Lean SaaS Metrics – The Definitive Guide to create business impact
This post provides SaaS entrepreneurs, Business Managers and Investors with an overview on the most relevant SaaS Metrics using the Lean-Case dashboard – a simulation tool to understand, create and validate the business model for a SaaS or any other subscription/recurring revenue business.
This post builds the foundation for a series of posts on understanding SaaS metrics, applying benchmarks, building a recurring revenue business model, scaling the right sales plan and win funding for your SaaS business with a lean case.
You will get a wide-ranging introduction to the key SaaS Metrics. We show you a comprehensive overview of metrics, provide pragmatic definitions, give simple examples, explain the calculations and offer short video tutorials.
The key element of this post is our Infographic “Lean SaaS Metrics Explained”. Please download it and feel free to share it:
More...
The infographic shows how to calculate three different types of metrics from left to right.
Key Viability Metrics | showing the short-term Payback and long term LTV/CAC Ratio |
Key Unit Metrics | describing key customer metrics Customer Acquisition Cost, Lifetime Value, Annualized Lifetime Value and |
Key Deal Metrics | characterizing the Average Deal and the components of the CAC. |
The Infographic is based on the Lean-Case Simulation Dashboard. It calculates the 3 categories of metrics for a single Sales Unit and one customer on just one dashboard screen. Just launch the Lean-Case Simulation Dashboard to create your SaaS case. We illustrate each step in creating your case with pragmatic examples and short video tutorials below.
Using Lean-Case, you can validate your own SaaS Case.
2 Key Viability Metrics
We are applying a simple “unit economics” model, i.e. we lay out the lifetime value (LTV) and the customer acquisition cost (CAC) for a single customer. Based on this, you can understand the short-term and a long-term indicator for your case and get a traffic-light indication ofthe viability of your case (see screen).
The short-term indicator “Payback Period” or “Months-to-Recover-CAC” defines how fast you recover the customer acquisition cost (CAC) over the lifetime of your customer
The long-term indicator “LTV/CAC ratio” also referred to as “God Metric” shows how many times the LTV exceeds the CAC
3 Key Unit Metrics
The Key Unit Metrics summarize the relevant customer key metrics: the Lifetime in Months, Lifetime Value (LTV) on a total and annualized base and Customer Acquisition Cost (CAC).
With a churn rate of 2%, the Customer Lifetime averages 50 months. Selling Cost, Cost of Leads and Partner Commission add up to a Customer Acquisition Cost of $3,436. At a Gross Margin of 70% of the Average Annual Contract Value, the Lifetime Value of a Customer is $19,950. On a 12-months basis, the Annualized Lifetime Value equals $4,788.
You’ll find handy definitions and examples for each of these metrics below.
How To Create your Business Plan without Excel
FREE 50-PAGE REPORT
by: Eckhard Ortwein, CEO and Founder of Lean-Case
3.1 Customer Lifetime in Months
Customer Lifetime in Months defines the average number of months for which a given class of customer pays revenues. It is calculated as 100% divided by the customer monthly churn rate.
If the churn rate is 2% – the average customer lifetime is 50 months.
3.2 Total Customer Lifetime Value (LTV)
The Total Lifetime Value (LTV) represents the monetary value of a customer across his lifetime. It is calculated by multiplying the Average Gross Profit per customer (which is the average monthly contract value multiplied by the Gross Margin for Recurring Services) by the Customer Lifetime in Months:
3.3 Annualized Lifetime Value
The Annualized Lifetime Value represents the value of a customer in the first year. It is calculated by dividing the Total Lifetime Value (LTV) by the Customer Lifetime in Months, then multiplied by 12.
3.4 Customer Acquisition Cost (CAC)
The Customer Acquisition Cost (CAC) is the sum of all Sales Unit related cost to acquire one customer (one deal). It sums up three Key Deal Metrics: (1) the Lead Generation Cost per Deal, (2) the Selling Cost per Deal and (3) Commissions per Deal. It does not include headcount cost related to sales-management and marketing.
4 Key Deal Metrics
Key Deal Metrics summarize relevant deal-related metrics such as Cost of Leads required, Lead Generation Cost per Deal, Selling Cost per Deal, Commission perDeal and Deals to meet Monthly target.
To Close one deal, the selling cost (the cost for Sarah and John) is $1,368 and the cost to generate leads for that deal is $2,000. In order to meet their monthly target, Sarah and John must close 7.3 deals per month. Given the conversion rate, the Cost of Leads Required (to meet the monthly target) is $14,620
You’ll find handy definitions and examples for each metric below.
4.1 Lead Generation Cost Per Deal
Lead Generation Cost Per Deal is the average cost required to produce enough leads to convert one of them into a Paying Customer.
Lead Generation Cost Per Deal are calculated as the average Cost per Lead multiplied by the Number of Leads Required. It does not include any headcount related cost linked to the Sales Unit (see Selling Cost per Deal).
4.2 Cost of Leads Required
Cost of Leads Required is the total amount of investment needed to produce the sales leads required to achieve the monthly target for the Sales Unit.
Cost of Leads Required is calculated by multiplying the Lead Generation Cost per Deal and the Deals to Meet Monthly Target (because Lean-Caseuses floating point calculations with several decimal places, results on dashboards might be slightly differentcompared to calculation with purely rounded numbers shown)
4.3 Deals to Meet Monthly Target
Deals to Meet Monthly Target is the number of new deals to be closed to achieve the monthly target of the Sales Unit
4.4 Selling Cost Per Deal
Selling Cost Per Deal is the average Sales Unit headcount cost of converting leads into a Paying Customer in a given sales unit. It takes the Sales Unit’s Base Compensation and Variable Compensation into account. It does not include any sales-management headcount cost.
4.5 Commissions Per Deal
Commissions Per Deal is similar to the Selling Cost per Deal, but the calculation only includes commissions that are typically paid to external parties as a percentage of Bookings. It takes the Sales Unit Metric Commissions into account. It does not include any sales-management related headcount cost.
5 Input your SaaS Case using the right assumptions
To calculate the above key metrics, we still require quite a few inputs such as Sales Unit Cost, Average Annual Contract Value or Pipeline Conversion Rates.
These can be clustered in 3 groups:
Sales Unit Metrics | to capture the cost and quota of a Sales Unit |
Average Deal Metrics | to calculate the Average Contract Value |
Customer Lifecycle Metrics | to record the profitability of the customer’s life |
6 Capture the Sales Unit Metrics
Let’s make a few definitions first. You start off every Lean-Case by defining a Customer Segment. You target this segment with your chosen sales model (e.g. direct sales). To implement this Sales Model, you have to hire new Sales Units. A Sales Unit represents the smallest part of your Sales Model (e.g. the Sales Unit of a direct sales model can be Sales Rep, the Sales Unit in a Channel Sales Model is a single partner, the Sales Unit of an online sales channel is made up by an inbound/outbound team, , …).
Test Ltd. sells to enterprise customers. It targets this segment with a Direct Sales model. Sarah and John are working as a Sales Team – Sarah being a Sales Rep, John being a Sales Engineer. They are jointly making up a Sales Unit.
The Sales Unit Metrics capture the yearly total-cost-to-company of a single Sales Unit as well as its Yearly Quota. If the Sales Unit represents a sales rep of a direct salesforce, you must capture the fully loaded cost of a Sales Rep. If the Sales Unit represents a partner channel, you must capture the commissions you pay to the partner. If the Sales unit represents an inbound/outbound sales team, you should capture the total cost of that team.
The Total Cost-to-Company of Sarah and John is made up of their Base Compensation, Variable Compensation and Additional Cost. They have an annual target to achieve which is measured in Target Annual Bookings.
You’ll find handy definitions and examples for each metric below.
6.1 Base Compensation
Base Compensation is the annual base compensation for your Sales Unit. Base compensation and Variable Compensation make up the On-Target-Earnings (OTE) of a Sales Unit. You should also include company benefits which you can factor in as an additional percentage to capture total-cost-to-company.
Test Ltd. pays Sarah an annual base compensation of $35,000 and John $25.000. The base compensation for their Sales unit is thus $60,000 (the average annual amount).
6.2 Variable Compensation
Variable Compensation is the Sales Unit’s success-based annual compensation beyond Base Compensation. It should also include benefits. Base compensation and Variable Compensation make up the On-Target-Earnings (OTE) of a Sales Unit. It rewards the Sales Units productivity for reaching the Sales Unit’s Annual Quota (Target Annual Bookings). It rewards the Sales Unit’s productivity for reaching the Sales Unit’s Annual Quota (see Target Annual Bookings).
For reaching the annual quota of their Sale Unit, Sarah gets paid $20.000 and John $20.000, i.e. the variable compensation for the Sales Unit is $40.000.
6.3 Additional Overhead
Additional Overhead refers to all miscellaneous operating expenses which can be directly linked to the Sales Unit, such as sales-related travel, communication and IT expenses. Make sure to include the social benefits that you can factor in as an additional percentage to capture total-cost-to-company.
Sarah has an annual travelbudget of $15,000 and John has IT expenses of $5,000, i.e. the additional overhead for the Sales Unit is $20,000.
6.4 Commissions
Commissions are the monetary amount paid to a Sales Unit (likely being a sales partner or agent) for selling a product or service. Lean-Case accounts for paid commissions as a percentage of the Annual Quota in terms of the Target Annual Bookings.
Sales Inc. is your external sales partner. Sales Inc. will receive 10% of the Annual Bookings it created. If it achieves Annual Bookings of $600.000, it will get a commission payment of $60.000.
6.5 On Target Annual Bookings
Target Annual Bookings represent the annual target to be achieved by a Sales Unit. Bookings occur when customers commit to buy (whereas revenues can only be recognized when the service is delivered to a customer, e.g. ratable every month. This is typically much later). Against this target, a Sales Unit is rewarded with a Variable Compensation or a Commission. If they achieve x% of this target, they will receive x% of the variable compensation or commission.
Test Ltd. expects Sarah and John to sign up 60 customers in one year for a service which is priced at $10,000/year – i.e. their Target Annual Bookings are $600,000 (= 60 x $10,000).
7 Calculate the Average Contract Value
The Average Deal Metrics capture all service related parameters to calculate the Average Annual Contract Value (ACV). Input all parameters related to the service tiers of your product to calculate the average Annual Contract Value.
Customers of Test Ltd. can select a Startup or Entreprise Plan, i.e. Test Ltd has 2 service tiers. 80% of deals are Startup deals with 5 users at a monthly price of $100 and 20% Enterprise Plan deals with an average of 5 users at a monthly price of $200.
Lean-Case allows to calculate the Average Deal Parameters by entering the Service Tiers for the company’s service. A Service Tier is a paid service plan offered to customers. Lean-Case allows users to define up to 5 service tiers; for example, “Basic,” “Intermediate” and “Pro” service tiers. Per Service Tier, the user defines the share of deals in percent of all deals across all Service Tiers. This allows Lean-Case to calculate the Average Deal Parameters.
You find handy definitions and examples for each metric below.
7.1 Tier Share in % of deals
The Tier Share in % of deals determines which percentage of customers signs up for a deal of this Service Tier.
Test Ltd. has 2 service tiers called “Startup” and “Enterprise”. 80% of deals are Startup deals, 20% Premium deals, i.e. the Tier share for the Startup Tier is 80% and the Tier Share for “Enterprise” deals is20%. Obviously, the Tier Shares have to add up to 100%.
7.2 Price Per Unit per Month
The Price per Unit per Month is the average monthly price a customer pays per unit (e.g. per server, per user, etc.)
Test Ltd. sells its units on a per-user basis in 2 Service Tiers – a Startup Plan and a Enterprise Plan. A Startup Plan user is priced at $100 per month, a Enterprise Plan user is priced $200 per month. 80% of the deals of Test Inc. are sold as Startup Plans and 20% as Enterprise Plans, i.e. the average Price per user per month averages $120 (80% * $100 + 20% * $200 = 80+40 = $120).
7.3 Number of Units
Number of Units is the average number of units a customer pays for per month (e.g. user, server, trx, ..). The Price per Unit per Month multiplied with the Average Number of Revenue Unitsyields the Monthly Recurring Revenues (MRR) per customer.
An average Enterprise Plan customer of Test Ltd. buys the service for 5 users per month, whereas the average Startup Plan customer buys for 5 users per month. 80% of the deals of Test Ltd. are sold as Starup Plans and 20% as Enerprise Plans, i.e. the average number of user per month averages 5.0% (80% * 5 + 20% * 5 = 4.0 + 1.0 = 5.0)
This results in an average of 5 users per customer.
7.4 Share of Monthly Subscriptions
Share of Monthly Subscriptions is the percentage of customers who have committed to purchase the service by making monthly subscription payments.
7.5 Share of Annual Subscriptions
Share of Annual Subscriptions is the percentage of customers who have committed to purchase the service by making one single annual payment (pre-paid) instead of making monthly subscription payments.
Test Ltd. sells 50% of its plans as an Annual Subscription and 50% as a Monthly Subscription. You only need to input the Share of Annual Subscriptions for each of your service tier and Lean-Case will calculate the Share of Monthly Subscriptions as well as the Average across all tiers.
7.6 Discount on Annual Subscription
Annual Subscription Discount is the discount in percentage on thePrice per Unit per Month offered by the company to encourage customers to prepay a single annual subscription payment instead of making monthly subscription payments.
On any Annual Subscription, Test Ltd. grants a discount of 15%. Instead of paying $250 on a Monthly Basic Plan, the customer effectively only pays $212.50 on a monthly basis.
7.7 MRR from Monthly Subscriptions
MRR From Monthly Subscriptions are the Monthly Recurring Revenues (MRR) for customers who are committed to monthly subscriptions. It is calculated by multiplying the Price per Unit per Month and the Average Number of Units.
On any Monthly Subscription for a Startup Plan, Test Ltd. Averages MRR of $500 which is the Number of Units (100) multiplied with the Price per Unit ($5).
7.8 MRR from Annual Subscriptions
MRR from Annual Subscriptions is the Monthly Recurring Revenues (MRR) for customers who are committed to annual subscriptions. It is calculated by applying the Annual Subscription Discount on the MRR From Monthly Subscriptions.
On any Annual Subscription for a Startup Plan, Test Ltd. grants a discount of 10%. Instead of paying $500 on a Monthly Basic Plan, the customer effectively only pays $450 on a monthly basis.
7.9 Annual Contract Value (ACV)
Annual Contract Value (ACV) is the average value of a service contract paid for 12 months. This is calculated as the Share of Annual Subscriptions multiplied by the MRR from Annual Subscriptions times 12, plus the Share of Monthly Subscription multiplied by the MRR from Monthly Subscriptions times 12
Test Ltd. sells 50% of its plans as an Annual Subscription and 50% as a Monthly Subscription. The MRR from a Monthly Subscription is calculated easily, e.g. for a Startup Plan the MRR is $500 (Average Price per unit per month $100 * Average Number of units 5).
On any Annual Subscription, however, Test Ltd. grants a discount of 10%. The MRR from a Yearly subscription is calculated as the MRR from Monthly subscription reduced by the Annual Subscription Discount ($500 * (1-10%) = $450).
The Average ACV per Service Tier is then calculated as:
ACV = (50%*450+50%*500)*12 = 6840
The general formula is
It may seem complicated but don’t worry! Lean-Case does all of this calculation for you! In fact, you only need to input the Share of Annual Subscriptions and Discount for Annual Subscriptions.
7.10 Average Professional Service Revenue per Deal
Average PS Revenue per Deal is the average one time service fee paid by a customer to enable the respective service tier. This could be service fees for service setup, service integration or training. Please also refer to Delay of revenue recognition in Segment Settings.
Test Ltd. sells a Startup Plan and a Enterprise Plan. Customers buying a Enterprise Plan typically require one-time Professional Services of $1000 to integrate and launch the service.
8 Record the profitability of the customer’s life
Taking a look at the customer lifecycle, you have to record all metrics to get-a-customer as well as to keep-and- grow him.
The Get-a-Customer phase is divided into two stages to convert a lead into a paying customer:
The Keep-and-Grow phase is split into two stages to maximize retention and profitability
To fill the sales pipeline for Sarah and John with enough leads, Test Inc. spends $20 per lead. Sarah and John convert 1.0% of those leads into paying customers. They manage to grow the revenues of a customer by 1.5% per month, but 2% of customers also churn away per month. From a profitability perspective, recurring revenues are delivered at a Gross Margin of 70%, Professional Services at a Gross Margin of 20%.
8.1 GET A CUSTOMER – COST PER LEAD
The Cost per Lead defines the cost to acquire a lead across lead channels.Cost-Per-Lead is the total amount invested in marketing activities to obtain one lead. This is calculated as the share of paid leads multiplied by the cost per paid lead.
Lean-Case calculates the Cost per Lead across various Lead Channels such as the Internet, telemarketing or conferences. Users can set up a maximum of 5 Lead Channels.
This allows Lean-Case to calculate the Average Cost-per-Lead across all Lead Channels.
8.1.1 Channel Share in % of Leads
Lean-Case calculates the Cost per Lead across various Lead Channels such as web, telemarketing or conferences. Users can set up a maximum of 5 lead channels with typically different cost structures. Per Lead Channel, the user defines the Channel Share in % of all leads providing the contribution of this lead channel in % of all leads. This allows Lean-Case to calculate the Average Cost per Lead across all lead channels. The shares across all channels have to add up to 100%.
Test Ltd uses an external agency to create its qualified leads, i.e. the Channel-Share-in-%-of-Leads must be 100%. Per qualified lead, Test Ltd pays $10 to its agency.
8.1.2 Share of Paid Leads
Per lead channel, the Share-of-Paid-Leads determines the percentage of leads which have to be paid for. In channels like telemarketing this is typically 100%. If you are using your website for lead generation and get a lot of free, organic traffic, this parameter can be reduced.
Test Ltd uses external agencies to create leads. However, Test Ltd wants to leverage the web for lead generation. Test Ltd estimates that 80% of the leads can be generated through advertising like Google Adwords and 20% of the leads can be generated through free traffic to the site. This means that Share of Paid Leads for this channel must be 80%
8.1.3 Cost Per Paid Lead
Cost-Per-Paid-Lead defines the average amount a company pays for each qualified paid lead created by this lead channel.
Test Ltd creates 80% of its leads via its Bus Dev Team and 20% via Online Activities.
For all qualified leads created by its Bus Dev Team, Test Ltd pays a Cost-Per-Paid-Lead of $23, i.e. the Cost-Per Lead also comes down to $23 (=$23 *100%)
Test Ltd also leverages the web for lead generation. 20% of the leads are coming direct to the website. 80% of the web leads are created via paid advertising. The Cost-per-Click for traffic generated through advertising like Google Adwords is $10.00. This means that the average Cost-per–Paid-Lead for the online channel must is $10.00.
The Cost-per-Lead for the Online channel averages $8 (=$10 *80%)
8.2 GET A CUSTOMER – PIPELINE CONVERSION
Via the PopupWindow Pipeline Stages, you can define the pipeline stages and conversion parameters to convert leads from one pipeline stage to the next – and finally converting a lead into a paying customer.
Lean-Case allows you to use four standard pipeline stages (Lead, Opportunity, Trial, Paying Customer).
Test Ltd applies 4 pipeline stages to turn a qualified lead into a paying customer.Test Ltd turns Qualified Leads into an Opportunity, an Opportunity should be converted into a Trial and a Trial should be converted into a Paying Customer.
You find handy definitions and examples for each metric below.
8.2.1 Conversion Rate
Conversion Rate is the percentage of all leads which have committed to buy the service and turned into paying customers. Lean-Case allows you to use four standard pipeline stage (Lead, Opportunity, Trial, Paying Customer)
Test Ltd applies 4 pipeline stages to turn a qualified lead into a paying customer.Test Ltd can turn 10% of its Leads into an Opportunity, 20% of its Opportunities into Trials, and 50% of its Trials into Paying Customer. This yields an overall pipeline conversion of 1.0% (=10%*20%*50%)
8.2.2 Number Required Per Deal
The column Number Required Per Deal shows how many leads/opportunities/trials are required to convert one of them into a Paying Customer.
Test Ltd applies 4 pipeline stages to turn a qualified lead into a paying customer.
With a conversion rate of 50% from Trial to Paying Customer, Test Ltd requires 2 Trials to acquire 1 new paying customer (=1/50%).
With an additional conversion rate of 20% from Opportunity to Trial, Test Ltd requires 10 Opportunities to acquire 1 new paying customer (=1/(50%*20%) )
With an additional conversion rate of 10% from Lead to Opportunity, Test Ltd requires 100 Opportunities to acquire 1 new paying customer (=1/(50%*20%*10%) )
This metric is a good indicator to understand if your pipeline is healthy to achieve your target.
8.2.3 Cost per Stage
The column Cost-per-Stage shows the cost to create a potential customer in the respective stage. The Cost-per-Stage is calculated by dividing the Cost-per-Stage of the preceding stage by Conversion-in-% of the preceding stage.
Test Ltd applies 4 pipeline stages to turn a qualified lead into a paying customer. Test Ltd pays a cost per lead of $20. With a conversion rate of 10% to convert a qualified lead into an opportunity, the Cost-per-Opportunity is $200
8.3 KEEP AND GROW A CUSTOMER– CHURN AND EXPANSION
The Popup Profitability, Churn and Expansion defines the profitability of a paying customer being relevant to also calculate the customer lifetime value and captures the revenue churn rate determining the customer lifetime and the revenue expansion rate from paying customers.
You find handy definitions and examples for each metric below.
8.3.1 Monthly Churn Rate
The Monthly Churn Rate is the percentage of Monthly Recurring Revenues which are “churning,” that is, being lost on a monthly basis (Revenue Churn). In general, there is an important distinction between “Revenue Churn” and “Customer Churn” which is the percentage of customers who discontinue their subscriptions in a given month. As Lean-Case considers the average Customer with average recurring revenues, revenue churn and customer churn are the same. The churn rate determines the customer lifetime (average time a customer is paying revenues).
Test Ltd observes a churn rate of 2% per month. i.e. the average lifetime of a customer is 50 months.
8.3.2 Monthly Expansion Rate
Monthly Expansion Rate is the percentage of increase in monthly recurring revenue received from existing customers who increase their purchases of services. This can be achieved by selling more units within the customer’s plan or by the upgrade of a customer into a higher service tier. The Monthly Expansion Rate is calculated using the same parameters as Monthly Churn Rate.If both, Monthly Churn Rate and Monthly Expansion Rate have the same value, the effect on MRR are offsetting each other.
Test Ltd observes an expansion rate of 1.5% per month. i.e. the recurring revenues per existing customer increase by 1.5%.
8.3.3 Gross Margin – Recurring Revenues
The Gross-Margin Recurring Revenues is the percentage of recurring revenues retained after paying the direct Cost of producing the services which were sold. This includes the cost of customer on-boarding, hosting and service. The Lifetime Value of a customer is calculated by also using the gross margin of a service (not the revenues).
Test Ltd sells its service at a Gross Margin of 70% on its Recurring Revenues. That means that Cost of Goods Sold requires a spend of 30% of Recurring Revenues.
Within Lean-Case, we refer to the Cost of Goods Sold also as Cost of Service.
8.3.4 Gross Margin – Professional Services
The Gross Margin Professional Services is the percentage of one-time professional service revenues retained after paying the direct Cost related to that service. This includes the cost of one time services such as service setup, service integration or training.
Test Ltd provides professional services to integrate customers with a Premium Plan. Professional Services are provided at a Gross Margin of 20%. This means that Cost of Goods Sold requires a spend of 80% of Professional Service Revenues.
Within Lean-Case, we refer to the Cost of Goods Sold also as Cost of Service.
9 Conclusion
This post gave you a wide-ranging introduction to the key SaaS Metrics. By showing you a comprehensive overview of metrics, providing pragmatic definitions, giving simple examples, explaining the calculations and offering short video tutorials, we are trying to build the foundation to understand, create and validate the business model for a SaaS or any other subscription/recurring revenue business.
Once you believe to have a set of realistic assumptions for your case, you can start creating and simulating a case with the Lean-Case Dashboard
The key element of this post is our Infographic “Lean SaaS Metrics Explained”. Please download it, let us know what you think and share it with your network.
Start Your FREE
Lean-Case 7-Day Trial Today...
Click on the “Start My FREE 7-Day Trial” button above… discover the viability of
any business idea in 20 minutes – and create your business plan in 2 hours or less…
(No Credit Card - No Excel required!)
